Errors of Judgement

Here's an interesting video from BetAngel about being open minded. I agree with the video's sentiment in that I too leave no stone unturned in the pursuit of edge. If I see something mentioned in a forum or on a website that is too good to be true then I don't move on to the next page, I investigate. I have plenty of data of my own but if someone's idea uses data that I do not have then I can easily task one of my price bots to gather the data I need to test validity.

Most of my ideas and yours too come to nothing, which is just the way things are in trading. More often than not we dicover how beautifully efficient markets are. Now, efficiency is an emotive word in trading. The problem is that for many people it is such a rigid definition. Mention "market efficiency" to some and you will hear a chorus of "No they are not!" especially in social media group think.

When I say "market efficiency" I do not say, "Markets gather all available information in zero time and a price in a market is the price it should be therefore betting and trading on sports is not profitable." After all, I do trade on sports markets so obviously that is not my definition of market efficiency.

What I do say is that prices are long-term efficient. All horses starting a race at evens (decimal 2.0 - probability 0.5) will win about half their races. What I never say is that a horse whose odds are 2.0 at the opening of a new market will win 50% of their races. At the beginning of a market's life span there is little or no information in that horse's price and those odds of 2.0 could be 1.80 or 1000.

The Wisdom of the Crowd is another marvel of market activity. Ask one person what the odds on a horse should be and probably they will be wrong. Ask ten people and they could all give different answers. But ask thousands of people through their betting activity and just before the off, when all public and private information has been teased out of those bettors with something to say about that market, the starting prices will be long-term efficient.

It's what happpens between market open and the start of an event that makes trading possible. Now, I am not a fundamental trader as far as the old-school pre-exchange definition is concerned. I trade market over-reactions, trader naivity, market dynamics and psychology, and various forms of arbitrage. I have created my own metrics for determining when to trade, all are tested for edge otherwise I wouldn't implement such strategies in my bots.

Obviously, there are inefficiencies in markets but markets are efficient at gathering public and private information and reflecting it in a price, only not instantaneously. Only when all public and private information is reflected in a price is that price efficient. Before all information has been reflected in the price then that price is open to speculation, both as to its validity and its trading potential.

So, to make things clear, markets are long-term efficient but there are various informational and technical reasons as to why prices do not immediately reflect their true price until a market closes before the event begins. The majority of us are not privy to private information, public information does not take future news into account (e.g. a horse that will act up in the parade ring, later in the day), beginner traders (especially the scalper variety) add noise that arbitrageurs can trade on, and there are many more reasons besides.

There are lots of ineffciencies that can be traded on but at the same time the market is efficiently gathering information through the wisdom of the crowd. To me that is not a contradictory remark, it is a fact.

Further Reading

Squares & Sharps, Suckers & Sharks: The Science, Psychology & Philosophy of Gambling contains a lot of excellent research on market psychology and efficiency. No trader should trade before reading it.